Sweet 16 Update - Jan 19

[dan_s]

Our Sweet 16 Growth Portfolio was up another 3.77% during the week ending January 18th. It is now up 19.26% YTD
> It is still trading at an 81% discount to my valuations and 45% below the current First Call price targets.
> First Call's price targets are an average of all the analysts' forecasts on file with Reuters. Some of them are quite old, so IMO only the valuations less than 30 days old have merit.

Gulfport Energy (GPOR) is leading the pack, up 41.2% YTD; closing at $9.25 on Friday
> The company has a new CEO who is off to a good start building credibility with the Wall Street Gang
> GPOR is one of the MOST PROFITABLE companies in the Sweet 16
> The company announced a BIG stock repurchase program that as already reduced the outstanding share count by 10% and should reduce it a total of 30%.
> The company provided an operational update last week and detailed guidance for 2019.
> I have updated my forecast/valuation model for GPOR and it has been posted to the EPG website. My valuation is $21.00/share.

All 16 companies are now up double digits YTD and I am expecting them to report strong Q4 results.

Because none of their oil is hedged going forward, CLR, EOG and CDEV have the most exposure to rising oil prices. Note that Continental Resources (CLR) doesn't have operations in the Permian Basin, therefore it is not exposed to the pipeline takeaway issue that the other two companies are.

We have four "gassers" in the portfolio this year: AR, GPOR, RRC and SWN.
> Antero Resources (AR) recently monetized a lot of their hedges to shore up their balance sheet. It does give them more commodity price risk, but that may be a good thing. Antero also produces ~150,000 barrels per day of liquids.
> Range Resources (RRC) looks like the "safe bet on gas". It is going to report very good Q4 results. It has 10% to 12% annual production growth locked in for several years. They have a fantastic marketing group that gets the company top dollar for their liquids and most of their Marcellus/Utica leasehold (much of it Tier One) is held by production, so the company can adjust capex spending to "live within cash flow". ~53% of their 2019 natural gas is hedged at $2.83/Mmbtu.
> GPOR should be drawing a lot of Wall Street attention next week. Several firms upgraded it to a BUY last week.
> Southwestern Energy (SWN) has the most leverage gas prices. They also announced a share buyback program that should support the stock price.

The pipeline takeaway capacity issues in the Permian Basin will depress oil and gas prices in West Texas, but they should be resolved later this year. Picking the "winners" in the Permian should be quite profitable for investors in 2019.

My valuations are based on the following oil & gas prices, adjusted for regional differentials and each companies hedges:
All of the Sweet 16 will be profitable at these oil and gas prices
Year: WTI oil / HH gas
2019
Q1: $45.00 / $3.00
Q2: $50.00 / $2.50
Q3: $55.00 / $2.50
Q4: $60.00 / $3.00
2020: $60.00 / $2.75

[dan_s]

I posted this last week under The View From Houston tab, but it is worth repeating. There is a "MYTH" going around that upstream oil & gas companies must have much higher commodity prices to make money. The "MYTH" is based on some "experts" opinions that capex spending should be considered an expense. One of these experts is an engineer with decades of experience who should know better, but maybe he just flunked Accounting 101.

Worth repeating:

Zacks Equity Research on January 18, 2019: "Major energy players are gearing up to report Q4 results, with Kinder Morgan, Inc. (KMI) having released thelr numbers on January 16. The sector is expected to report year-over-year earnings growth of 68.3% on 14.6% revenue growth."

Read that again and let it sink in.

Sometimes I think the oil & gas sector is the most misunderstood sector by the Wall Street Gang. It certainly doesn't help that some "experts" keep saying that money spend on drilling & completing wells ("capex") is an expense. I guess they never took an accounting class.

At Tulsa University (were I got my Accounting degree and a Masters in Taxation) they taught me that money spent to build a valuable income generating asset like an oil well or a factory was an increase in Fixed Assets and s/b amortized over the life of the asset. In Accounting 101 they call it the "Matching Principle". Capital expenditures need to be matched against the revenue of the assets they built.

This morning I took a look at EOG's latest presentation. On slide 4, EOG says that they estimate that their entire 2018 drilling program will generate an After Tax Rate of Return ("ATROR") over 100%. BTW they said on their Q3 conference call that their 2017 drilling program reached Payout in nine months, which is more than a 120% ATROR. Anyone that tells you these companies aren't building value is an idiot. I worked at Hess Corp. for 18 years (U.S. E&P Division Controller) and we NEVER had an annual drilling program that generated more than a 30% ATROR.
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Now find out which two of our companies Zacks Equity Research thinks are going to report Q4 results that beat the First Call estimates. Based on my forecasts, most of them will beat First Call's Q4 EPS estimates.
https://finance.yahoo.com/news/4-energy ... 03852.html

[dan_s]

Antero Press Release: During the fourth quarter of 2018 Antero initiated its $600 million share repurchase program.

As previously announced, through year-end 2018, Antero returned $129 million of cash to shareholders by repurchasing 9.1 million shares, thereby reducing shares outstanding by 3%. Additionally, during the fourth quarter, Antero monetized $357 million of its hedge position allowing the Company to further deleverage while maintaining upside to the natural gas strip in 2019.